Nintendo Will Have a Lot to Prove on Tuesday

By Rick Munarriz Markets Fool.com

Image source: Nintendo.

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One of last year's biggest comeback stories wasNintendo(NASDAQOTH: NTDOY). Shares of the video game pioneer soared 50% in 2016, with most of those gains coming during the second half of the year when Nintendo was tied to three hot products.

Now it's the moment of truth. Nintendo reports financial results for its fiscal third quarter next week, and the sustainability of its recent gains rests largely on what the Japanese gaming giant has to say in Tuesday morning's report.

Nintendo is resonating with investors as a result of the success of Pokemon Go, Super Mario Run, and the NES Classic mini console. There's also buzz building for Nintendo Switch, the company's next-gen gaming console that will hit the market in early March. However, each of those four lines come with challenges in truly paying off for investors in the revitalized stock.

Ninendo's four horsemen

Pokemon Go was this summer's hottest mobile gaming app, cracking open the market for augmented reality games. The game's July debut broke app records, and Nintendo stock was off to the races. The problem here is that Nintendo owns just 32% of Pokemon and an even smaller stake in the game's developer and publisher Niantic Labs.

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Nintendo has more riding on Super Mario Run, the hot game that broke Pokemon Go's records on the iconic App Store with 40 million downloads in its first four days of availability. The rub here is that the game is a free download. Folks only need to pay up if they want to continue beyond the first three free levels. It remains to be seen if folks are paying up for the premium levels or just moving on to the next hot shiny new thing in gaming.

NES Classic -- a $60 miniature console that comes pre-loaded with some classic Nintendo games -- was one of the hot products on holiday lists this year. Unfortunately for Nintendo, it couldn't make them fast enough. Resale markets gave opportunistic speculators the ability to cash in by selling into the pre-holiday demand at prices much higher than $60, but Nintendo obviously doesn't see any of those markups.

All three products put Nintendo on the map again, and that's great. However, they are products that replace categories that used to be far more lucrative for Nintendo. Players of mobile games can be fickle, and even the premium versions come at much lower price points than traditional software purchases. NES Classic also didn't open the door for additional software sales, as the mini machine doesn't read discs or cartridges.

Switch things up

Nintendo's third-quarter report on Tuesday will be the first full quarter of Pokemon Go availability and the period when Super Mario Run and NES Classic were introduced. Getting to see how these three trendy products paid off for Nintendo is important, but the market will also want to gain some insight on the March 3 release of Switch.

Nintendo Switch is a console with a portable gaming solution when it's not docked to a TV. The $299 price point was higher than many expected, especially since that's more than entry-level Xbox and PlayStation systems when Nintendo's hardware has historically been cheaper. Pre-sales have sold out quickly, but console makers typically hold back initial supply as a way to generate buzz on the demand end.

Investors are hoping for some big numbers and rich color on Tuesday, and that report will help dictate whether the good times continue for Nintendo stockholders or not.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.